A global incentive scheme that could reduce carbon emissions
With President Joe Biden’s administration re-engaging the United States in the Paris climate agreement, and with a major United Nations climate change conference (COP26) slated for later this year, there is new hope. meaningful global policies to meet the challenge. But as mounting evidence of growing climate volatility – unprecedented wildfires in Australia, droughts in California and sub-Saharan Africa, intensifying hurricane and cyclone seasons – suggests we need to act quickly to reduce global warming greenhouse gas (GHG) emissions, there are serious obstacles to any new global deal.
Economists generally agree that the way to reduce GHG emissions is to tax them. But such taxes will almost certainly lead to disruptive economic changes in the short term, which is why discussions about their imposition tend to quickly run into issues of free riders or fairness.
For example, industrialized countries such as the United States fear that while they work hard to reduce emissions, developing countries will continue to pump them with abandon. But at the same time, developing countries like Uganda point out that there is a deep inequity in asking a country that emitted only 0.13 tonnes of carbon dioxide per capita in 2017 to endure the same. burden than the United States or Saudi Arabia, with their respective per capita. emissions of 16 and 17.5 tonnes.
The cheapest way to reduce global emissions would be to give each country similar incentives. While India shouldn’t keep building dirtier coal plants as it grows, Europe should shut down plants it already has. But each country will want to reduce its emissions in its own way, some through taxation, others through regulation. So the question is how to balance priorities at the national level with global needs so that we can save the world we have.
The economic solution is simple: a global carbon incentive (GCI). Each country that emits more than the global average of about five tonnes per capita would contribute annually to a global incentive fund, the amount of which would be calculated by multiplying the excess emissions per capita by the population and the GCI. If the GCI started at $ 10 a tonne, the United States would pay around $ 36 billion and Saudi Arabia would pay $ 4.6 billion.
Meanwhile, countries below the global per capita average would receive a proportional payment (Uganda, for example, would receive around $ 2.1 billion). That way, each country would face an actual loss of $ 10 per capita for every additional ton it emits per capita, whether it started at a high, low, or medium level. There would no longer be a free rider problem, as Uganda would have the same incentives to save on emissions as the United States.
The GCI would also address the issue of fairness. Low emitters, who are often the poorest countries and the most vulnerable to climate change they did not bring about, would receive compensation with which they could help their populations adapt. If the GCI is increased over time, the collective sums paid out would approach the $ 100 billion a year that rich countries pledged poor countries at COP15 in 2009. This would far exceed the meager sums that have been allocated. available so far. Better yet, the GCI would assign responsibility for payments in a feasible way, as large issuers are usually in the best position to pay.
In addition, the GCI would not stifle domestic experimentation. It recognizes that what a country does at the national level is its own business. Instead of collecting a politically unpopular carbon tax, one country could impose prohibitive regulations on coal, another could tax energy inputs, and a third could encourage renewable energy. Each chart its own course, while the ICG complements all the moral incentives that already lead to action at country level.
The beauty of GCI lies in its simplicity and self-financing structure. But that would require an adjustment in the way per capita emissions are calculated. What is consumed is as important as how it is produced, so it will be necessary to take into account the share of emissions incorporated in imported goods; these must be added to the importer’s emissions count and subtracted from that of the exporter.
Also, most experts would consider a GCI of $ 10 to be too low. But the goal is to start small in order to get the project going and fix the problems. After that, the GCI can easily be increased by mutual agreement (or reduced, if there was a miraculous breakthrough in emission reduction technology). But to avoid creating uncertainty after an initial calibration period, changes might be considered only every five years or so.
What about alternative proposals that have global effects? Some industrialized countries plan to impose a national carbon tax alongside a border adjustment tax, effectively applying the same tax rate to goods from countries that do not have a carbon tax. Border taxes might cause other countries to impose their own carbon taxes, but that would certainly not improve fairness. On the contrary, they would let the large importing countries impose their tax preferences on poor exporting countries and could serve as a Trojan horse for protectionism.
Certainly, the bureaucrats who dominate international meetings will want to dismiss this proposal as “interesting but simplistic” (or words to that effect). The most powerful countries are also the biggest emitters, and few want to invest in a global fund, especially in these times of massive budget overruns.
But an GCI is by far the best option available. As rich countries seek remedies for national inequalities, they should spare a thought for inequalities between countries, which the pandemic and uneven deployment of vaccines will only worsen. Developing countries today feel abandoned. A fair proposal to reduce emissions would help reassure them that they are not living on another planet. And that would give everyone a greater incentive to save this one. © 2021 / Project union
Raghuram G. Rajan is the former Governor of the Reserve Bank of India and Professor of Finance at the Booth School of Business at the University of Chicago.
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